ETF Expert

In all likelihood, September will mark the 5th straight month of losses for major stock benchmarks. Yet the real downtrend did not begin in May. In fact, several big time indexes hit brand new multi-year highs in July of 2011.

In spite of a memory lapse on the part of the mainstream media, markets recovered rather quickly from the May-June swoon. Why? In essence, there had been enough confidence in European banks such that the intra-bank lending rate (3-month LIBOR) had dropped from 0.55% in August of 2010 to a multi-year low of 0.25% in July. In other words, at the same time stocks were reaching for new heights, banks were lending to each other at the most hospitable rate in years.

Granted, the U.S. government stalemate, subsequent U.S. treasury downgrade and endless stream of negative economic news in August of 2011 created a volatile atmosphere for risk assets. Yet those fears might have been put to bed were it not for the sovereign debt issues in Europe.

Need proof that extreme pessimism is rooted in fears about the global financial system? Examine the trend for 3-month LIBOR.

For example, in August 15 commentary, I talked about the fact that LIBOR had jumped 17% from 0.25 to 0.293. By September 15, LIBOR had reached 0.34. And today, it has climbed to 0.37.

The fact that it might cost a bank 48% more to borrow than it did 2 1/2 months earlier implies intra-institution mistrust. It also implies that the 17 butlers of the European Union better get their collective act together… quick!

In spite of the nastiness in the LIBOR trend — in spite of my long-standing recommendation to maintain a lighter-than-normal allocation to Stock ETFs — I see light at the end of the “Chunnel.” My reasoning? Investors have begun to liquidate everything, from the safety of emerging market debt to precious metals to treasury bonds.

Cash may be king when the bear is clawing at your portfolio. Then again, if cash moves from being the king to becoming the kingdom, the bottom is closer than people think.

Obviously, the recent liquidation of everything from iShares 7-10 year Treasury (IEF) to SPDR Gold (GLD) does not constitute a “buy signal.” We still require a convincing European plan to recapitalize banks. What’s more, corporate earnings will need to continue their own personal uptrend in October.

That said, the speedier the dash to move cash to the sidelines, the greater the probability of a friendlier Q4. And that’s a change I would most definitely welcome. 

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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFseasier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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